Christine Lagarde, head of the International Monetary Fund, says tighter bank
supervision and tougher regulation will not prevent the risky behaviour that
triggered financial crisis

Tough new rules designed to prevent banks from becoming "too big to fail" will not prevent the risky behaviour that triggered the 2008 financial crisis, according to the head of the International Monetary Fund (IMF).

While bank capital buffers were now stronger than they were in the run-up to the crisis, Christine Lagarde said industry reforms were still too slow, and would be hampered by a "fierce industry pushback".

"The finish line is still too far off," Ms Lagarde told a conference in London on Tuesday. "Some of this arises from the sheer complexity of the task at hand. Yet, we must acknowledge that it also stems from fierce industry pushback, and from the fatigue that is bound to set in at this point in a long race."

Tighter bank supervision to ensure regulatory reforms were implemented would help to change attitudes to risk, Ms Lagarde said. However, she warned that regulation and supervision alone were not enough.

"Rules can certainly affect behaviour—think of compensation practices, for example. But people who want to skirt the rules will always find creative ways of doing so," said Ms Lagarde. "We also need to turn our attention to the culture of financial institutions, and to the individual behavior that lies beneath. Incentives must be aligned with expected behaviour and be made transparent."

The IMF chief also warned that the lack of a global agreement to wind-down big banks in case of failure had created a "gaping hole" that meant systemic risks and and the problem of "too big to fail" were still a threat.

"First on the agenda should be an agreement on cross-border resolution of megabanks—providing a framework to unwind them in an orderly way in case of failure. This is a gaping hole in the financial architecture right now, and it calls for countries to put the global good of financial stability ahead of their parochial concerns."

Ms Lagarde said the complex nature of bank reform meant policymakers had to tread a fine line between introducing tougher rules without derailing the recovery. "But complexity is not an excuse for complacency and delay," she added.

The conference on "inclusive capitalism" was also attended by Prince Charles, who highlighted some of the changes needed to achieve a transformation of the current form of capitalism in order to achieve "lasting and meaningful returns".

The Prince said the transformation would "involve putting young people properly at the heart of companies' employment practices and planning strategies, in order to tackle more effectively the world's growing youth employment crisis.

"It would also go some way to helping those who are most vulnerable in our societies," he said.

Speakers at Tuesday's conference include former US president Bill Clinton and Mark Carney, the Governor of the Bank of England.

The Telegraph Investor

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